Disguised remuneration schemes - don't let bad advice damage your business

Nathan Talbott, of Wright Hassall's Tax and Financial Services Litigation team, explains what individuals and organisations should do if they suspect they've had poor advice around tax rules for remuneration schemes

Retrospective tax continues to divide opinions across the UK, as HMRC looks to penalise individuals or businesses found to have unlawfully avoided past payments.

The most recent example of retrospective tax aims to crackdown on people using disguised remuneration schemes, which HMRC believes helped an estimated 50,000 individuals avoid Income Tax and National Insurance contributions.

On April 5, 2019 the loan charge was introduced, targeting individuals who received their income in the form of loans, with no intention of paying the loan back.

Poor advice

The loan charge has been introduced to combat tax avoidance schemes, where undoubtedly people will have acted on guidance from professional advisers.

Many individuals will not have been given a comprehensive breakdown of the potential risks involved with disguised remuneration schemes, basing their decision entirely on the expertise of their adviser (usually an accountant).

This includes being told the scheme was HMRC compliant, approved by a senior tax barrister and/or numerous other clients had used the scheme previously without any problems.

When you pay someone for advice, either by fee or commission and their advice proves to be poor, bad or fraudulent, you can seek to recover your losses.

Time is of the essence

For unsuspecting businesses who have been contacted by the HMRC and have previously acted on the advice of a professional adviser, the clock is ticking to make a claim before the window of opportunity expires.

There is a strict six-year (or three year date of knowledge) time limit for you to bring the claim, typically for the difference between where you would be if you had normal tax planning advice versus the aggressive tax planning advice that created the issue.

With HMRC taking an increasingly aggressive approach to tax recovery, it is critical that individuals who have made tax-related decisions in good faith waste little time collecting evidence and contacting an experienced legal team.

Collecting evidence

Collating communications and collecting the necessary evidence can be a difficult task, especially as HMRC claims sometimes take many years to materialise after a lengthy investigation process into a person's tax affairs.

It is essential to record and store all communications, paperwork and emails, as this will help establish what the individual was told by the adviser and the risk they were prepared to accept.

In the case of disguised remuneration schemes, the individual must have been given the opportunity to make an informed decision about the potential consequences, with all the risks explained in detail.

As soon as a significant amount of money has been identified as lost, then the individual concerned should speak to an experienced solicitor to establish whether there is the possibility of a claim for professional negligence.

Steps to make a claim

If a professional negligence claim is to be commenced, as part of the Professional Negligence pre-action protocol, a letter before claim will be drafted by the solicitor, giving the adviser three months and three weeks to state their position.

If the matter cannot be resolved during the pre-action protocol period and no form of alternative dispute resolution can be achieved, then the solicitor will advise on whether issuing proceedings is the appropriate next step.

Once issued, the court process takes over and the parties must adhere to the timeframes imposed, with a trial likely to start in 9 to 24 months' time if a compromise is not reached beforehand.

Seeking professional guidance…

While the loan charge and retrospective tax has divided opinions, the financial impact it could have on businesses and families should not be underestimated.

Disguised remuneration schemes have been used to avoid tax payments in the past, but for some individuals, the mistake was an honest one, caused by professional negligence from advisers.

If you have fallen victim to the loan charge based on poor tax advice, contact a team of experienced solicitors and begin building your case, sooner rather than later.